Is a Balanced Budget Amendment a Good Idea?

Some House and Senate Republicans have pushed hard to include a “balanced budget” constitutional amendment as part of any agreement on a debt ceiling, and the final accord — passed Monday by the House of Representatives and awaiting action by the Senate — identified such an amendment as one path to the bill’s deficit-cutting provisions.

Its supporters say such an amendment is a way to keep spending and deficits under control by requiring that federal spending not exceed revenues. But there are three main problems with this potential approach as it is currently articulated.

The first issue, which has been forcefully identified by my fellow Economix blogger Bruce Bartlett, is that there is no way to make this amendment work. The language proposed would, as part of the “balance,” limit federal government spending to 18 percent of gross domestic product, and only a two-thirds majority in both houses of Congress could waive that limit. On the table, in effect, is a balanced budget amendment with a spending cap.

G.D.P. is not a legal concept but an economic measure, the details of which change all the time, subject to the prevailing view of best practice among statisticians. To take one example, the flow value of housing services for people who own their houses is imputed to create a number that is roughly equivalent to what renters pay.
The goal is to measure more accurately a key component of consumption, which represents the largest category of spending within G.D.P. But let me emphasize the “roughly equivalent” — the models used are sometimes called into question and must be revised from time to time. And imputed spending on housing is a big number – probably around $1 trillion in today’s economy (with total G.D.P. at about $15 trillion).

If an enterprising future administration wanted to lower spending relative to measured G.D.P., it could convene a panel of experts that could duly find that our current practice of not valuing household services — like cooking and taking care of children — is a statistical aberration as well as an affront to people who work very hard providing those. That should add at least $5 trillion to our annual G.D.P.

Alternatively, a statistical adjustment in the other direction would force real and painful spending cuts. The Constitution is the wrong place to pursue such details.

Second and more seriously, imagine that this constitutional amendment were in place and that federal spending were roughly at its limit relative to the size of the economy. Then, what happens should the financial sector blow up again — either through no fault of its own (which, believe it or not, is the current prevailing myth on Wall Street about 2007-9) or because of some toxic combination of malfeasance and malpractice (the current predominant view of 2007-9 among many other people)?

The blame game is irrelevant when G.D.P. drops 10 percent; the issue is how to prevent a Great Depression. But note that with such a decline in G.D.P., a level of nominal spending that was 18 percent of G.D.P. is suddenly 20 percent, and now a constitutional crisis awaits – even before we get to the question of whether tax cuts or other forms of stimulus might be appropriate.

It makes no sense to take aim, as a matter of constitutional process, at two numbers that are both outcomes of deeper economic processes.

And to be frank, sometimes it makes a great deal of sense to apply an economic stimulus to an economy in free fall. One such moment was 1930 (and 1931 and 1932), when no stimulus was applied. Other moments were 2008 and 2009; both President Bush and President Obama initiated stimulus packages. When credit for and confidence in the private sector evaporates, do you really want the government sector to be forced to make quick cuts — or to raise taxes?

Third, why is 18 percent of G.D.P. the right number to set in stone? The argument given — for example, at a recent hearing of the Joint Economic Committee of Congress — is that this is what the federal government has spent, on average, in recent decades.

Alternatively, as the United States begins to have a larger share of older people relative to the total population, perhaps it makes sense to increase spending — as a share of the total economy — on people over the age of 65?

Or, given today’s problems in public education, perhaps we should consider investing more in children who can — if they are able to become sufficiently productive — support an aging population while paying only moderate taxes.

What is the right amount of federal government spending relative to G.D.P.? That’s a great question, worthy of considerable deliberation, including during the presidential election campaign of 2012. But setting it in stone now at precisely 18 percent of G.D.P. makes no sense.

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